Travelzoo 2020 Q3 Form 10-Q Summary
Business Context and Reporting Period
Travelzoo is a global Internet media company providing travel, entertainment, and lifestyle deals to approximately 30.5 million members. Revenue is generated primarily from advertising fees, voucher transactions, hotel-platform commissions, vacation packages, and Jack’s Flight Club subscriptions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Travelzoo exited its loss-making Asia Pacific business in March 2020; related results were reclassified to discontinued operations. In January 2020, the Company acquired 60% of Jack’s Flight Club, a subscription-based airfare service.
Financial Performance and Liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $13.8 million | $23.8 million | $41.1 million | $79.6 million |
| Gross profit | $10.9 million | $21.0 million | $33.4 million | $71.2 million |
| Gross margin | 78.8% | 88.0% | 81.1% | 89.4% |
| Operating income (loss) | $(1.2) million | $3.4 million | $(13.2) million | $14.1 million |
| Net income (loss) attributable to Travelzoo | $(1.4) million | $0.3 million | $(14.2) million | $4.8 million |
| Basic loss per share | $(0.12) | $0.03 | $(1.25) | $0.40 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $37.6 million | $1.9 million |
Q3 revenue declined 42% year over year, while nine-month revenue declined 48%. Q3 operating margin was negative 8.7%, compared with 14.2% in the prior-year quarter; the nine-month operating margin was negative 32.0%, compared with 17.7% in 2019. Operating expenses were $12.1 million in Q3 and $46.5 million for the nine-month period.
Cash and cash equivalents were $50.5 million at September 30, 2020, compared with $18.7 million at December 31, 2019. Including restricted cash and discontinued operations, total cash, cash equivalents, and restricted cash were $52.0 million. The Company reported negative working capital of approximately $13.7 million, primarily reflecting $41.7 million of merchant payables related to voucher sales.
Debt and similar obligations included $1.7 million of promissory notes payable to Jack’s Flight Club sellers, due in June 2021, and $3.7 million of PPP loans, with a two-year maturity and a 1% interest rate. The remaining $1.7 million of promissory notes, plus $79,000 of accrued interest, was paid in October 2020.
Material Changes Versus the Prior Comparable Period
- COVID-19 materially reduced travel and local advertising demand, voucher activity, and partner spending. Q3 Travelzoo North America revenue fell to $9.1 million from $15.3 million, while Europe revenue fell to $3.7 million from $8.5 million.
- Travel revenue declined to $12.2 million in Q3 from $20.6 million, primarily because of lower Top 20, Newsflash, and website advertising revenue. Higher Getaways voucher sales partially offset the decline.
- Local revenue declined to $645,000 in Q3 from $3.2 million, reflecting lower Local Deals voucher sales.
- Jack’s Flight Club contributed $987,000 of Q3 revenue and $2.6 million from its January 13 acquisition date through September 30, 2020. The segment reported Q3 operating profit of $250,000.
- Sales and marketing expense declined to $6.9 million in Q3 from $12.0 million, and product development expense declined to $592,000 from $1.4 million, reflecting lower headcount, acquisition, and professional-services spending.
- General and administrative expense increased to $4.5 million in Q3 from $4.2 million and to $16.7 million for nine months from $13.6 million, primarily due to higher stock-based compensation related to amended and newly granted options.
- The Company recorded $2.9 million of goodwill and intangible-asset impairment during the first quarter, including $2.1 million of goodwill impairment and $810,000 of trade-name impairment related to Jack’s Flight Club.
- Operating cash flow of $37.6 million was driven substantially by a $33.2 million increase in accounts payable and merchant payable, a $6.2 million decrease in accounts receivable, and non-cash adjustments. The cash flow benefit may not represent recurring operating profitability.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal numerical revenue or earnings guidance. Management expects COVID-19 to negatively affect 2020 and 2021 results and potentially extend beyond 2020, with the duration and severity remaining uncertain. Advertising partners paused or canceled campaigns, travel partners experienced cancellations, and voucher refund requests increased.
The Company expanded its voucher refund policy to allow full refunds for eligible unredeemed or unexpired vouchers. A $2.3 million refund reserve was recorded at September 30, 2020. Merchant payables generally become due when vouchers are redeemed; accelerated redemption could pressure liquidity.
Management expects cash on hand to cover working-capital needs for at least the next twelve months based on projected redemption patterns. However, additional financing may be required if redemption activity accelerates or operating losses continue, and financing may not be available on acceptable terms.
- Jack’s Flight Club acquisition-related items included a $1.5 million gain from partial promissory-note forgiveness, a $448,000 estimated payment obligation tied to 2020 net income, and a put/call arrangement potentially exercisable in 2022.
- Stock-based compensation totaled $5.2 million for the first nine months, including substantial option grants, increases, and repricing at a $3.49 exercise price.
- Operating lease liabilities totaled $15.4 million at September 30, 2020.
- The Company maintains a 26.6% equity-method investment in WeGo, recorded at $2.1 million, and had not made the additional potential $1.7 million investment because performance targets were not met.
- Foreign-currency exposure remains material; a hypothetical 10% adverse movement in exchange rates would have produced an estimated $647,000 incremental foreign-exchange loss for the nine-month period.
- Future payments under the historical Netsurfers promotional-share program cannot be reliably estimated. The Company also has tax contingencies, including approximately $381,000 of unrecognized tax benefits and accrued interest.
Important Facts for Investors to Verify
- Whether travel advertising, voucher sales, and local-deal demand recover as travel restrictions and COVID-19 impacts change.
- The sustainability of operating cash flow given its dependence on increased merchant payables and working-capital movements.
- Voucher redemption rates, refund claims, merchant-payable settlement timing, and the adequacy of the $2.3 million refund reserve.
- Jack’s Flight Club subscriber retention, subscription revenue growth, profitability, and potential 2021 or 2022 purchase obligations.
- The effect of significant stock-based compensation and the 1.9 million options granted or amended for the former Global CEO, as well as other option awards.
- Liquidity after the October 2020 repayment of the remaining Jack’s Flight Club promissory notes and the Company’s ability to fund continuing losses without new financing.
- Potential additional impairment of goodwill or intangible assets if Jack’s Flight Club or broader travel-market conditions deteriorate.